Using Appendix 3 and other information, consider the effects on CR of the decrease in taxes and the increase in interest rates in country P . Which change is likely to have the greatest effect on CR's profit in its first year? Justify your answer. Decrease in taxes: . . . . . . . Increase in interest rates: . . . . . . . Conclusion: . . . . . . .

Justification could include:
- A decrease in taxes will have the biggest effect on CR's profit as consumers will have more income after tax to spend. Therefore, revenue from the sale of rugs may increase, and if costs do not also increase, then profit will increase. The increase in interest rates will only affect CR's profit if the bank loan of \$20000 is definitely taken out.
- An increase in interest rates will have the biggest effect on CR's profit as lower taxes may not affect demand for luxury rugs because only high-income people will purchase luxury rugs. An increase in interest rates may discourage Charly from building a larger factory and she may choose to start-up on a smaller scale at location A. This will lower the output from the factory and is likely to decrease future profit from the lower sales of rugs.